I completed some of my homework by reading all of the suggested Hathaway essays. While I found them interesting, I did not find them much more compelling or convincing than when I read them when the were originally issued. If anything, some of the now two year old concerns about imminent collapse and dire consequences which have not come to pass have made me more comfortable with my current views. I have some experience in the gold markets, along with some numbers which may or may not be correct, which lead me to certain personal "comfortable conclusions" I just want to give you the following overview of "where I'm coming from" I may be well be completely wrong, but I am willing to live with such consequences.
SUPLY/DEMAND - While the exact numbers can be debated (GFMS vs. WGC vs. Veneroso) I feel pretty comfortable with a general trend that demand has gone down while primary mine production has increased. I think total demand has gone from about 4228mt in 1997 to 3946mt last year and will be around 3600mt for 2001. Mine production has gone from 2472 in 1997 to 2573mt in 2000 and should hit 2604mt in 2001. The gap has gone from 1756mt in 1997 to 1373mt last year , and may be 996mt for 2001. When one considers scrap filled 629mt of the gap in 1997 and should be about the same in 2001, the remaining gap (dependent on forward sales, central banks sales, and disinvestment) has dropped from 1127mt to 367mt, down 67%. If I was worried (which I wasn't) about forwards sales or central bank sales five years ago, then I would be even less concerned today with their potential impact only about 1/3 of what it was them.
PRICES/COSTS - Gold prices have been more stable over the last few years that just about any period I can think of. Average prices for 1999 and 2000 were $279.16 and 279.15, respectively. Standard deviations were 16.86 and 9.77. So far in 2001, prices have averaged $268.15 with a standard deviation of 7.33. OK, too many numbers, but sometimes it is easier running a business when the price of your product is stable. I know mining companies do not like the low prices, but they have done a better job than anyone (expect maybe me <g>) had expected or predicted. Average cash costs are down and although it isn't a pretty business and they are not making any profits (just liquidating assets as you say), relatively few (and no big firms) have gone out of business. They are just starting to get around to some serious mergers. I am still of the opinion that we need five firms producing over 50% of gold, and a 10moz producer is probable (Anglogold)
HEDGING - I still think hedging is a legitimate and useful financial tool. I agree with you that many Australian firms took the concept way too far and are more likely to have problems. Meanwhile Anglogold and Barrick, which I consider to have "modest and manageable" hedge positions continue to be demonized by the rhetoric. The poster boys for bad hedging, Ashanti and Cambior, were supposed to be the first dominoes in a complete implosion of miners and bullion banks. Reality is their problems, although severe, were not enough to put them out of business, nevermind destroy the entire industry. Meanwhile, net hedging was -10mt in 2000 (10mt covered), which means that hedged positions probably maxed out in late 1999. They are going flat-to-down based on the good sound free market conditions you have mentioned, which means the incentive to hedge is greatly reduced. It just does not make sense to replace contracts written years ago at $340 with contracts at current prices and low interest rates. Firms are probably going to deliver some production into hedges, buy them back, or at least convert forward sales into more prudent (lower risk) option strategies. Every day I think the hedging situation becomes more manageable.
CONCLUSION - I would rather be optimistic and think the gold industry will successfully survive the current extended downturn and move ahead like they have in the past. I would rather invest in companies and managements who can deal with the realities of the gold markets and do well in the current environment. Many of the companies we have suggested and/or own (Agnico Eagle, Goldcorp, Meridian, Glamis ,etc.. ) can make money and be good investments despite the current gold price. I would rather not be pessimistic and hope for a collapse in financial markets, corporate bankruptcies, or terrorist attacks to make gold prices go up. I would rather not invest in a company than need gold to rise $100 before their marginal properties are economic. I rather profit from good companies and good news, than depend on marginal companies and bad news.
PROPOSAL - This thread is "Gold and Silver Mining Stocks", so I think the efforts you have made to share details of specific companies rather than debate many of the issues I mentioned above is the road to take. Besides, I enjoy stock picking and making money more than I enjoy spending hours typing on SI on the more theoretical (highly debatable and emotional) macroeconmic topics. Let's talk stocks ! |
